VAT implications of Brexit "no deal"

VAT, at its core, derives from EU law. Inevitably, specific changes would need to be made to the UK’s VAT rules in the event of a “no deal”.

This note summarises the VAT implications that businesses will need to consider in light of the UK Government’s technical guidance paper “VAT for businesses if there’s no Brexit deal” published on 23 August 2018. The first batch of these papers does not offer any guidance on the direct tax issues in the event of no deal, so to complete the picture, our separate note on the direct tax considerations can be found here.

The UK Government has confirmed that in a no deal scenario, the UK will continue to have a VAT system that will largely mirror existing procedures. Businesses in Northern Ireland face continued uncertainty as the UK Government (at the time of writing) has stated that it is not in a position to offer any further information on this sensitive subject.

It is too early to tell whether any of the positions taken on VAT in the event of a no deal are indicative of where the land might lie in the event of an agreement. One thing is clear, uncertainty invariably lingers for businesses with cross-border trade.

Imports

Goods imported from the EU to the UK after 29 March 2019 will switch to the existing rules for imports from non-EU countries. Businesses will need to be prepared for import VAT to be paid however the well- documented cash flow concerns for businesses will be mitigated, as UK businesses will be able to account for their import VAT on the VAT return rather than physically paying it as the goods arrive at the border. This easement will be applicable to EU and non-EU imports, but time will tell whether this will be open to fraudulent abuse. The payment of other duties will still be required and businesses may consider applying for the Duty Deferment Scheme to manage their cashflow position and avoid having to pay duties every time a consignment is brought into the UK. Ultimately duties are not recoverable and will therefore represent a real cost to the business.

The paper confirms that Low Value Consignment Relief will be abolished for all parcels arriving in the UK, not just from EU member states. All goods entering the UK as parcels from overseas businesses will be liable for VAT (unless those goods are relieved of VAT under domestic law). New technology is proposed (that will be available for overseas businesses in “early 2019”) for parcels valued up to £135 arriving in the UK from overseas businesses. The treatment of parcels with goods worth more than £135 from EU member states will be in line with existing practice for non-EU countries.

Exports

Goods exported from the UK to EU businesses will be treated as an export and continue to be zero-rated. However, EU member states will treat the associated import in line with their own rules for goods entering from other non-EU countries. Businesses should review the relevant rules to understand the filing, payment and refund mechanisms as the EU VAT refund system will no longer be available. Some member states can be notoriously slow at issuing VAT refunds under the non-EU refund claim mechanism so businesses may wish to review their supply chain to understand where the potential cash flow issues arise.

UK businesses will no longer be required to complete an EC sales list and businesses may welcome this reduced administrative exercise. The guidance makes no mention of intrastat declarations but as they relate to supplies between EU member states, there is an expectation that this would also be abolished in due course.

For UK businesses selling goods in EU member states, rules will be in line with existing “rest of world” rules. UK businesses will need to register for VAT in the EU member states where sales are made.

Existing “place of supply” rules for services will broadly continue to apply as they do now. For digital services supplied to consumers in the EU, the place of supply will continue to be where the consumer resides.

Certain supplies of financial services to non EU recipients grant the supplier a right to input VAT recovery on its costs whereas similar services provided to EU recipients (including the UK) result in an input VAT restriction. For businesses where this is relevant, the UK Government has said the rules “may be changed”, therefore banks and insurers will want to watch this space.

VAT compliance and systems

The UK’s Mini One Stop Shop (MOSS) will no longer be available for supplies of electronically supplied services to EU customers. Businesses that want to continue to use the MOSS system will need to register under the non-EU scheme but can only do so after 29 March 2019. Businesses will need to prepare to cover the period until the non-EU scheme is up and running. The alternative would be to register in all the EU member states in which sales are made which is not practical and would place a significant compliance burden on businesses.

EU VAT registration number validation will continue to be available irrespective of the UK’s membership of the EU. UK VAT registration numbers will no longer be part of this service so in due course an equivalent system will be provided for UK VAT numbers.

The date the UK formally leaves the EU coincides with HMRC plans to introduce its Making Tax Digital programme from April 2019. This will require businesses to use the Making Tax Digital for Business system to submit their VAT returns online so businesses should continue with the ongoing preparation for this change. There remains a question as to whether the VAT return itself will be amended in light of acquisitions and dispatches no longer being available but this was not mentioned in the current guidance.